An Opportunistic Market
As world financial markets continue to fluctuate, traditional investment products have experienced both volatility and diminished performance. Stocks continue to be volatile investments and their movement and value fluctuations have been significant. There is a substantial flight of private investment from both mutual funds and the equities markets. Many investors today are looking for more conservative non-correlated investments that offer potential for high growth but with less sensitivity to market turmoil.
This alternative investment, a high-yield non-correlated asset class exits in today’s market within life settlements. The life settlement market is experiencing an abundance of suitable investment grade policies being offered for settlement as limited capital is flow available for purchase. Never in the history of the US Life Settlement market has there been a more favorable "risk/reward" ratio.
With regard to risk reduction, the US Life Settlement market has already celebrated its 10th anniversary. Much of the early market stage risk and inefficiencies have been reduced or removed as the young market evolved over a decade into a more regulated and more transparent marketplace with greater standardization.
The asset class, as it passes its 10th anniversary, is becoming more mature. Oversight and a lack of regulation have long been the source of scrutiny in the industry. More and more states are now regulating providers. Within the industry, best practices focused on greater due diligence and disclosure are continually improving the quality of companies in the industry. Companies that have been unable to adhere to the new standards have been forced out as the Life Insurance Settlement Association and the Institutional Life Markets Association improve industry standards and best practices.
The industry now has a better understanding of mortality risk which affects the timing of returns on investment. On a combined basis the largest and most respected life expectancy providers have completed nearly 1 million individual life expectancy projections during the last decade. Based upon their considerable data and experience, mortality tables have been updated, processes have been improved and methodologies have been enhanced. Today’s life expectancies benefit investors with what we believe to be more reliable mortality predictions.
As affirmed by the US Supreme Court in 1911, a life insurance policy is protected personal property and policy owners have the legal right to sell their policy. However, before market liquidity was created through the emergence of the life settlement industry, surrendering the policy to the primary carrier was the only option for an unwanted or unaffordable policy. The life settlement market has unlocked the economic value in senior life insurance policies. The remarkable growth in this market is being driven by the value created for insurance consumers.
Through market research, Life Policy Dynamics, LLC (a Peninsula Group company) has obtained actual numbers to suggest that life settlement transactions are an attractive option for senior insured consumers. The most recent survey shows an industry average life settlement offer to broker representing 18.5% of the policy face value. The research further reported that the economic value unlocked through a life settlement far exceeds the cash surrender value which averages 4% of policy face value.
On average investors were paying 25% more for life settlements and ingoing return projections were in the low teens on a probabilistic buy and hold basis. Remarkably, considering the favorable reduction in mortality risk due to increasing life expectancies, Peninsula has been able to acquire high quality life settlements during 2010 with an average ingoing IRR projected in the high teens. During the global recession and liquidity crisis, life settlement investments have becomes a buyers’ market. A reduction in capital and limited credit availability has reduced demand for life settlements. Acquisition costs for policies have decreased allowing for selective acquisitions focused on policies with higher quality and better value.